A note on fiscal policy for highway systems: How to price and invest in highway facilities and operations

Jung Eun Oh, Purdue University


A shortfall in highway funding in the U.S. is forcing highway agencies to search for viable financing options. This will likely lead to reforming fiscal policy for highway systems. A sound highway fiscal policy comprises two components: generation of adequate revenues through efficient pricing and/or taxation mechanisms and allocation of available resources in an efficient and equitable way. The present study first synthesizes the state-of-the-art and the state-of-the-practice of the subject, and then makes suggestion on how to improve the situation. The first part of the subject—how to price the transportation system—entails identification of who the system users are and what activities to charge, and how much that pricing should be. While the current fuel-tax-based financing mechanism has sustained highway funds for many years, its limitations are known with regard to its adequacy and impacts on system efficiency and equity. By contrast, the self-financing highway system suggested in the present study seeks maximization of system efficiency (i.e., aggregate social benefit) by charging users for what they are individually responsible. A highway cost allocation conducted in this research suggests a usage-based pricing scheme that self-finances a highway system by having separate rates according to geographic location, facility type, and vehicle classification. In the second part of this study, how much to invest in a highway system is discussed, that is, how can true highway needs be determined. This study's econometric models explain the relationships between highway expenditure and highway performance, using 10-year highway expenditure data (by program, state, and highway functional class) and performance data (pavement quality index and fatalities) in the U.S. The results provide new insights into the current and historical effectiveness of highway expenditures. Based on the statistical evidence, a framework to assess highway needs, which is complementary to the prevailing methodologies, is suggested. The suggested framework estimates the required highway investments needs in order to meet the target level of highway performance. Finally, the present study discusses issues and challenges that are critical in implementing the suggested analytical solutions in the real world.




Sinha, Purdue University.

Subject Area

Civil engineering|Transportation

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